Money-Income Causality in Bangladesh An Error Correction Approach

The causal relationship between money and income remains a contentious and lively issue in the literature. Even though the literature on this issue is voluminous, however, for Bangladesh it is quite nascent. A few earlier studies suffer from methodological deficiency as they did not take into consider the time series properties of the variables. The objective of this paper is to look on the causality between money and income in Bangladesh. The paper differs from the earlier ones regarding data used and econometric techniques applied. The main contribution of the paper is to address the issue of short run dynamics of the money income relationship within a long run relationship. The empirical results show that money supply and income are cointegrated, implying that there is stable long run relationship between them. The estimated error correction model shows that there is bidirectional causality between money and income, implying that monetary policy should be undertaken to realise the basic macroeconomic goals of achieving higher level of output.